Sotheby’s Catches A Bid

By Jonathan Berr | October 04, 2013 AAA

Activist investor Dan Loeb, who has made winning bets on Yahoo (Nasdaq:YHOO) and Herbalife (NYSE:HLF), has set his sights on Sotheby’s (NYSE:BID), the venerable 269-year-old auction house whose recent history has been sketchy.

Loeb’s Third Point fund is the company’s largest shareholder, owning a 6.35 million shares, a 9.3% stake, an increase from a 5.7% position disclosed in August. He has called for the ouster of CEO William Ruprecht and Sotheby’s board in a filing with the Securities & Exchange Commission.

“In particular, we are troubled by the Company’s chronically weak operating margins and deteriorating competitive position relative to Christie’s, as evidenced by each of the Contemporary and Modern art evening sales over the last several years,” Loeb wrote in a letter to Ruprecht. “We are not persuaded by management’s explanation that Sotheby’s lower market share is due to uneconomic and predatory behavior by Christie’s to secure major works.”

Loeb’s dim view of Sotheby’s is not unique. Wall Street fatcats, including Loeb, have been circling the company for months. Earlier this year, billionaire Nelson Peltz, another activist investor, announced he had taken a 3% interest in the auction house and said he was interested in engaging in a “dialogue” with management. Hedge fund manager Mark McGuire of Marcato Capital Management has amassed a 7% stake and is seeking among other things the sale of Sotheby’s flashy headquarters building on Manhattan’s Upper East Side, an idea the company is considering.

In his letter, Loeb likened Sotheby’s to a faded painting by an old master in need of restoration. The metaphor is apt. The duopoly that the company and rival Christie’s have enjoyed in the art market for centuries has weakened in recent years because of the growth in online auctions. Sotheby’s most recent earnings disappointed Wall Street and having new entrants such as Amazon (Nasdaq:AMZN) and eBay (Nasdaq:EBAY) enter the fine art market doesn’t help matters either.

Sotheby’s has been forced to rebate seller’s commissions on works to get business instead of relying on the quality of its expertise, according to Loeb . He argued that the company’s “ malaise is a result of a lack of leadership and strategic vision at its highest levels.”

Loeb also accused the board of overpaying management and wasting money, Not surprisingly, the company rejects Loeb’s analysis.

“Today, rather than debating incendiary and baseless comments, we are focused on serving our clients’ needs during this critical autumn sales season, including this week in Hong Kong, where our offerings are 77% higher than the same series last year the highest estimate of any Sotheby’s sale in Asia,” Sotheby’s says. A company spokesperson could not be immediately be reached for comment regarding this story.

Sotheby’s may be a giant in the art world but with a market cap of about $3.4 billion it is fairly small potatoes on Wall Street. Many investors doubt things are going to get better. A whopping 13.8% of the company’s shares are sold short, betting that the shares will fall.

Shares of Sotheby’s have surged more than 48% this year and have outperformed the Standard & Poors Midcap Index over the 1, 5 and 10-year periods. Many on Wall Street are wondering if a deep-pocketed investor might want to add the auction house to their personal collections. Loeb, for one Is a serious art collector who favors contemporary works by the likes of Andy Warhol and reportedly employs a curator for his collection.

Sotheby’s and Christie’s were caught in a price-fixing scandal earlier this decade that resulted in its principal owner A. Alfred Taubman serving time in prison. According to Loeb, Sotheby’s is still reeling from this scandal along with the recent economic slowdown.

Were Sotheby’s to be taken over by Loeb, or anyone else, CEO Ruprecht would stand to receive a payout of more than $7 million, including $4 million in severance, according to the company’s latest proxy.

The recent gains in the stock market are making activist investors increasingly bold. Billionaire Carl Icahn, who recently tangled with Michael Dell, is advocating that Apple CEO Tim Cook undertake a $150 billion stock buyback. Besides his fight with Sotheby’s, Loeb has also been trying to shake-up Sony. But his efforts with the electronics and media company have been unsuccessful so far.

Bottom Line

Investors, even those who don't know the difference between a Monet and a Manet, should consider adding shares of Sotheby's to their portfolios. Sotheby's is a venerable brand that would be an attractive addition to a private equity firm. Investor activism cuold be a catalyst for prices to rise, maybe not like an old master, but they should do just fine.

Follow Jonathan Berr on Twitter@jdberr and at Berr’s World.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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